Ross Greenwood speaks to Paul Dales, Chief Economist at Capital Economics for Australia and New Zealand, about whether the housing boom is over
Introduction: Has the housing boom come to and end?
Ross Greenwood: Let’s go to those house prices is that quite clearly is showing signs of falling in most parts of Australia right now, especially in Sydney which has been the leader of the pact for the past five years. You could actually say that the boom in Sydney house prices has come to an end. Now, over this last month, this is actually the quarter going into the end of September, according to the domain, the prices have fallen significantly and this comes off the back of big, big falls that have been around the place for quite some time.
It’s now a situation where you’ve got a case where the overall market was down by 1.9% the median price according to domain still over 1 million dollars. But in, say, for example, the city in Eastern suburbs, house prices down by 6%. You’ve actually got other areas including, say, for example, the Inner West down 3.9%, the Western Suburbs down by 3.8%, the Southwest down 4%.
Now Brisbane, similar type of situation, you’ve actually got houses overall down about 1.5%, but in Ipswich down 1.6%, Greater Brisbane down 0.2%. Redland, the one standout, they’re up by 2.5% the median price $539,000. Then go to, say, for example, Canberra, there’s another one you can actually look at and Canberra house prices actually continue to rise according to this domain report over the quarter up by 4.3% annually, 10.5%, it’s been one of the best property markets in the country.
The best of the property markets right now appears to be Melbourne. Although, even there some areas towards the city appear to be also just starting to flag a little bit the median price in Melbourne at $880,000.
But the point is what happens from here and the suggestions are that this is not the end of price falls in some of these key markets. Let’s now go to Paul Dale who is the Chief Economist for Capital Economics in Australia and also New Zealand. Many thanks for your time, Paul.
Interview with: Paul Dales, Chief Economist, Capital Economics
Paul Dale: My pleasure.
Ross Greenwood: One of the last times we spoke about this, you indicated to me that based on incomes, you believe that house prices especially in Sydney a 30% overvalued. Does that imply that you believe that house prices in Sydney could potentially fall by 30%?
Paul Dale: It sort of puts what you might call an upper limit on the potential fall in house prices. It just gives us some benchmark or way to quantify what is ultimately something that’s impossible to quantify. As it happens, I do think house prices will probably fall into Sydney over the next few years, but perhaps by a lesser 10% or so, so. It’s not quite a cataclysmic as perhaps the undervaluation estimations appeared suggest.
Ross Greenwood: Okay. We’ve seen here, say, for example, the 1.9% fall in Sydney house prices, clearly different in different parts of the cities. But then, Canberra clearly still going forward, Melbourne still going forward, Brisbane, obviously, prices, there are pretty flat more than anything else. This is potentially only the start, there is more to come in the future but potentially could also trigger further falls.
Paul Dale: Well, I think, the real big issue for me is that I suspect the house prices will probably move sideways or broadly stagnate over the next couple of years. There might be some quarters where there’s some small falls but there might be some quarters where there’s some big rises. What is really key is what happens as and when official interest rates in Australia rise from their current record low. Now, I don’t think that’s going to happen until the second half of 2019, so we don’t need to worry about it just yet.
But when it does happen, I think there’s going to be a lot of people who are going to feel the brunt of that quite quickly as they’re carrying a lot of debt and haven’t actually experienced interest rate rise before. At that point, that’s when the market would be at its weakest once interest rate starts rising. Till then, it’s more of there’s going to be some good times and some bad times, but overall, it’s neither going to be brilliant or terrible.
Ross Greenwood: Okay, but then let’s go again to the logic of the Reserve Bank, surely even the Reserve Bank making a decision to raise interest rates. Although, they could be forced to do so by international circumstances, they would be very wary of the impact on home buyers and therefore, on the general economy. If they were to raise interest rates and potentially kill off consumer demand or even kill off even some business investment in housing.
Paul Dale: That’s right. That’s one of the reasons why at Capital Economics, we don’t actually think that interest rates will go up until late 2019. There’s some other economists and the financial markets who thinks the RBA will probably raise interest rates next year. But we think that the RBA would just proceed very cautiously because of the high level of household debt because it doesn’t want to put those heavily indebted households under too much stress.
In other words, I think it’s going to wait until the economy is much stronger until there’s much greater science inflation is picking up before raising interest rates because of the housing situation.
Ross Greenwood: The second part about this is also that the regulators, in particular the banking regulator, APRA, but also the Reserve Bank until a certain extent even ask it with the Chairman there Greg Medcraft, saying that he thought that there was a housing bubble, especially in Sydney and Melbourne.
That they have really played a significant role in trying to ease back the price growth that have been there previously; things such as, making it more difficult for investors to get loans, try to slow down the rate at which banks would lend to investors, clamping down on interest-only loans. All of this is really now coming to a head to actually slow down these markets. The point, also, I guess is how long they will try and keep those policies if the housing market really does show signs of falling and falling rather significantly.
Paul Dale: Yes, that is a really good question. This slowdown has been deliberately engineered by the policymakers. In theory, if it were to go too far too soon, they could remove some of the restrictions. But my instinct is that policymakers weren’t really want to do that. It’s very hard for them to signal one moment that everyone’s just taken on too much debt, it’s too risky. To suddenly change their minds a year later that actually people should take off as much debt as they’re possibly carry on regardless.
I think what will actually happen is that the policymakers will just sit tight and hope that the housing market doesn’t weaken too much, too soon. I suspect one of the reasons that won’t happen is because interest rates won’t rise until late 2019.
Ross Greenwood: There’s another aspect of this and that is from the big picture, the macro point of view and you make this point. This is about trying to make certain that the overall economy, the stability of the system remains sound and one of the fundamental issues with the Australian economy is too much household debt.
The fact is, if this is a signal in some ways for households to pull their horns in to pay down a bit of debt, that ultimately makes the economy safe, the safer for longer-term economic growth and that would be in the forefront of the minds of those regulators in the Reserve Bank.
Paul Dale: That’s exactly what they’re trying to achieve. They’re trying to avoid the US-style financial crisis, housing collapse scenario. The one that was so dramatic is being portrayed in a number of Hollywood films. So far, they’re doing a reasonably good job of that. Although, there’s probably some people out there who was taken on loans that they can’t afford to repay.
Lending conditions in Australia have not been anywhere near as loose as they were in America ahead of the GFC. I think policymakers are doing the right thing and that’s one of the reasons why they’re probably not going to loosen conditions because they really don’t want to find themselves in a situation where they’re having to deal with a full-blown systemic financial crisis.
Ross Greenwood: Paul Dale’s Chief Economist of Capital Economics in Australia and New Zealand. As always, we appreciate your time here on the program.
Paul Dale: That’s my pleasure all the time.
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